Using the 200-Day Moving Average and Relative Strength to Rotate In and Out of Winners, with Starbucks Exhibits
Almost every portfolio manager looks at the 200-day moving average and relative strength versus the index. Some rotate in and out of long-term winners like Starbucks (SBUX) based on fundamental signals using a sector rotation strategy. Unfortunately, technical indicators are lagging signals and sometimes false signals. As you can see on the 20-year Exhibit 13.1 for Starbucks, it provided enormous returns compared to the index. These are the stocks that portfolio managers and investors love because they show how easy it is to trounce the index over time with well-known stocks. Also note that in Exhibit 13.1 every time the 200-day moving average was violated, it was an opportunity to buy on weakness for the long term. The only exception was the Great Recession of 2008–2009. Starbucks crashed worse than the market. But at the bottom it provided a great opportunity for bottom fishing because it went from $7 to a high of $62 between 2009 and 2012.
In this chapter, you will examine the signals that lead or run ahead of the 200-day downturn. Obviously, the 10-, 20-, and 50-day moving averages will lead, but frequently reverse, giving a false signal long term. Even the “death cross,” when the 50-day drops ...